“Fashions fade, Style is eternal”

Today’s post has been kindly drafted for us in the offices of De Tullio & Partners, Intellectual Property Attorneys, Bari, Italy.

Managing partner and friend to the Helpdesk Mr Elio De Tullio, together with his associate, Mr Giacomo Bucciarelli, have put down in writing what they have experienced to be the main problems faced by SMEs in the fashion industry, along with their top tips on how to adequately protect and enforce their rights in China.Credit: Henry Jose, click for profile

Fashion and Intellectual Property in China

Monsieur Yves Saint Laurent once said: “Fashions fade, style is eternal”. This is an unquestionable truth, but what paves the way to eternity is certainly Intellectual Property and its protection.

In fact, Intellectual property is the tool best able to evaluate our ability to be creative and innovative. It’s the measure of the possibility to create something unique, which can affect the progress of our future and generate benefits for ourselves, for the people around us – sometimes for all humanity. Innovation, creativity, know-how, research, but also the appearance of the products, as well as the attractive character of the marks, are all key factors that enable companies to be competitive in a highly globalized market, which selects products on the basis of quality.

More and more often, consumers choose a product paying particular attention to its aesthetic aspect, to its design. Also brands and their reputation are attracting consumers, as happens with trademarks such as Valentino, Armani, Versace, Gucci and all other leaders of the Italian fashion industry which, on the basis of the reputation that the respective companies have been able to create and maintain throughout the years, have attained significant portions of the market.

Fashion IP in China: from trademark protection to the fight against counterfeiting.

Speaking of luxury and the fashion industry, several topics may come to the readers’ minds when approaching IP related matters: trademark protection, design patent, copyright and counterfeiting.

With particular reference to trademarks, there are two main factors that often represent an obstacle to foreign Fashion companies deciding to expand their businesses to China. On the one hand, China has a “first to file” trademark jurisdiction. This means that protection is granted to those who first file a trademark. The “first to file” rule has been a huge issue for foreign companies, considering the common practice of local entities who apply for other’s trademarks in China or for similar versions in order to get the “first to file” privilege.

On the other hand, the differences in language are to be considered. In fact, when applying for a trademark in China, the applicant should think about filing also the transliteration of his trademark in Chinese characters, as well as protecting its phonetic translation, or both them.

Recently, in July, the Chinese Trademark Review and Adjudication Board (TRAB) in Beijing overturned the decision of the State Intellectual Property Office to grant a trademark to “Michael Bastian” and a Chinese transliteration to an unrelated entity. In particular, the TRAB applied the principle of honesty and good faith, even though there was insufficient evidence of Michael Bastian’s use of the trademark or publicity in China prior to the date of filing by the defendant.

This decision represents a landmark in the application of the principle of good faith, that makes possible for foreign entities to rightfully use and register their trademarks in China, even though they have been subject to trademark hijacking.

Another pivotal aspect that emerges in relation to fashion IP is the fight against counterfeiting, a phenomenon that affects the whole Chinese industrial system and somehow represents a source of wealth for China.

As the China customs agency report revealed in 2014, seizing has increased significantly: customs Authorities have suspended the clearance of 27.000 shipments, of which 24.000 suspected of IPR infringements (mostly related to trademarks) and 95.5% intended for export. Among all the goods seized, 8% concerned apparel, while the 1% concerned footwear.

Multinationals, SMEs and Foreign brand owners are the target of counterfeiting and IP theft, and two assumptions have to be made.

On the one hand, brand protection activities should focus on certain IP rights and products and should be directed only to certain regions; on the other hand, investigative and raiding activities should be outsourced to external professionals and firms. This is because such companies may not have sufficient resources to invest in combating IPR infringements throughout China on a fixed base and to conduct the related investigations. Moreover, in the cases where they manage to build up an investigative team, it would face some difficulties in covering all possible manifestations of counterfeiting of all the company brands.

Particularly hit by counterfeiting are foreign brands, especially luxury brands. However, counterfeiting does not hit all brands in the same way: with specific regards to fashion brands, counterfeiting results mostly in their dilution and the loss of investments and market share.

Generally speaking, counterfeiting in China is characterised by some typical structural elements, even though the products concerned are various, and so is their demand and supply.

Manufacturing and warehousing are mostly conducted covertly, while trading is carried out openly. Counterfeiters can be divided into three categories. First, we find individuals or small-scale businesses, often family-run types of counterfeiting ventures, who may conduct alternative legitimate businesses and illegal manufacturing and trading activities, or small underground workshops. These entities may conceive and implement their own counterfeiting business independently or may decide to serve as one of the many manufacturing, warehousing or trading rings in a broader counterfeiting chain. In this latter case, these smaller counterfeiting units will often operate without knowing and having direct contact with the masterminds of the entrusting syndicate.

A second category of infringers is represented by organisations economically sustained and managed by financially capable entities and individuals which bring together several businesses − undercover or legitimately registered companies − to run their large scale counterfeiting ventures. Each of the entities involved in these organizations carry out the activities of manufacturing, labelling, trading, distributing, selling etc. Therefore, the reseller often does not really know who has made the products he is exhibiting in his market stall or trading on the Internet. In this second form of counterfeiting, composed of individual units not fully integrated with and directly related to the masterminds of the counterfeiting, it’s harder to eradicate the whole organisation through single interventions against each of the external manifestations of the infringing venture (shutting down domain names and e-commerce sites, raiding of retailers, factories or warehouses).

The third category of counterfeiters includes OEMs or their employees without knowledge of their upper management, which may decide to sub-contract to illegal ventures the manufacturing of parts and components in order to maximize profits. This poses an obvious and direct threat to the supply system of the brand owner, by having often sub-standard parts officially supplied as they were made by the contracted OEM.

Now, having seen how counterfeit goods are made, let’s see where they are sold, i.e. the Internet, the place where the greater part of IPR infringements occur.

One of the main Chinese e-commerce platform, Alibaba, has been criticized by the State Administration for Industry and Commerce for the lack of protection for brands on its platforms and for the poor quality of the goods sold online, and is now investing many efforts against counterfeiting.

In this framework, on the cyber-law side, the Chinese Parliament has published on July 6 a draft cyber security law (available at http://chinalawtranslate.com/cybersecuritydraft/?lang=en) that tightens Beijing’s control over data, with potentially significant consequences for internet service providers and multinational firms doing business in the country.

In particular, the document boosts users privacy protection from hackers and data resellers, but, at the same time, strengthens the government’s powers to obtain records on and block dissemination of private information deemed illegal under Chinese law. Citing the need “to safeguard national cyberspace sovereignty, security and development” the proposed legislation will allow China to bolster its networks against threats to stability and better regulate the flow of information.

According to the draft law, Internet Service Providers must store data collected within China on Chinese territory, while the data stored overseas for business purposes must be government-approved; moreover, Network equipment must also be approved under testing standards issued by China’s cabinet.           The leading government body appointed for making and enforcing policy for the Internet is the Cyberspace Administration.

In practice, the law would oblige ISPs and platforms to actively monitor user activity and delete content that is forbidden by law in order to prevent that information from spreading.

Under current practice, both ISPs and Content Service Providers are required to designate some personnel to handling censorship notices issued by Government and party authorities, and to implement these requests round the clock.

The draft law explicitly states that failure to prevent illegal information from spreading will result in punishment including warning, fines and even forced closures. Law enforcement can also enlist network operators’ help for national security and criminal detection purposes.

Moreover, the draft provides for the network operators to require users to provide real identity information when signing service agreements to ensure the traceability of their Internet activities and content. If users do not provide real identity information, network operators must deny them the relevant services. While the draft imposes obligations to protect privacy on the ISPs, it does not impose equally comprehensive obligations on public authorities in relation to their collection and processing of personal information within the broad scope of ‘Internet security maintenance’.

The draft has already met some critiques, since as many Chinese laws, the language is vague enough to make it unclear how the law will be practically enforced. Others said that the draft law would institutionalize censorship practices that were not explicitly formulated before.

Enforcement of Fashion IPRs

China has a dual-enforcement system, whereby trademarks and design patent owners can seek enforcement before a civil court (People’s Court) or a specialised administrative organ.

Among the major differences between the two types of enforcement, is the fact that economic damages derived from a trademark or a design patent infringement can only be claimed before a civil court.

In order to issue an injunction, civil courts require the applicant to pay a deposit, while the infringer will be in many cases notified and invited to a hearing and to file opposition to the injunction. Furthermore, the applicant must follow up the injunctive order with the filing of a civil lawsuit (within 15 days from the injunction) in order to keep the seizure legally binding. All this takes time and it is costly. Counterfeiters are fast to disappear, considering that, as anticipated above, they normally are not legally registered enterprises with sizeable assets, but “underground” operations. A civil injunction will normally arrive when they have already disappeared and moved to another area. The whole process would end up in high costs without any concrete results for the brand owner.

In summary, injunctions from a civil court in China are normally more suited to traditional forms of patent and trademark infringements, rather than anti-counterfeiting. This is why, against counterfeiters, trademarks are normally enforced through administrative raids rather than civil judicial process. While it is very difficult to obtain injunctive orders from civil courts, it is an accepted practice of the administrative enforcement authorities to conduct raids without advanced notice to the infringer upon request of the right holder. Although administrative organs have the power to order the destruction of the counterfeit manufacturing tools, this rarely happens in practice.

In order for a trademark holder to obtain administrative-led enforcement against a counterfeiters’ factory or warehouse with seizure and destruction of counterfeits, the trademark holder is normally required to provide sighting information of the infringing entity to the administrative organs.

This is done by resorting to detectives who often supply free sightings to manufacturers, requesting money afterwards to help the manufacturers file applications with the administrative enforcement organs for the raiding of the sighted targets. The administrative enforcement officials territorially competent, after a brief verification of the evidence supplied by the investigator on behalf of the trademark owner, and the validity of the activated trademarks, will conduct a raid of the target (sometimes even on the same day of the request for action).

At the end of the raiding procedure, after receiving a further confirmation from the trademark owner of the counterfeited nature of the seized goods (so called “verification” statement), the seized goods will be destroyed and the counterfeiter will be fined (normally a rather small monetary fine). A downsize of this modus operandi is that not all administrative or police organs are willing to take action, for political and economic reasons.

In extreme cases, the enforcement authorities will leak the information of an upcoming raid to the targets, giving them sufficient time to disappear once the officials will later arrive on the spot for the seizure of the infringing goods. The choice of the proper enforcing organ will play therefore a determinant role in the success of an enforcement raid. An administrative raid with its low monetary fines, often results in a mere temporary eradication of the infringing venture. Such actions may not constitute a sufficient deterrent for the raided counterfeiters.

As in trademark administrative enforcement, design patent enforcement before administrative organ could lead to an administrative order to destroy the manufacturing machines, with the beneficial effect of destroying the most significant asset of the infringer, putting him immediately out of business.

This would indeed be a very good reason for a right holder to privilege design enforcement, were it not for the fact that both civil and administrative enforcement requires the notification of the infringer and this obviously reduces the appeal to enforce design patents instead of trademarks. This is definitely a shortcoming of the Chinese legal system and a correction of the same could make this type of enforcement more effective.

However, design can be a very good complementary right to attack an infringer and increase his legal and economic exposure.

As far as criminal law is concerned, an act of counterfeiting is not per se a criminal conduct until its dimensions in terms of quantity of goods and illegal revenues involved reaches given statutory thresholds. Police raids are less frequent because infringers carefully organize production and storage so as to avoid accumulating large quantities of counterfeit products in the same place for a long time. Even if a factory produces large quantities, it may organize production so that delivery is done continuously in small batches (often at night or after PSB office hours), so as to reduce the time window in which a large number of finished goods could be found in the factory and/or warehouse. Aside from that, criminal enforcement is also not as harsh in practice as it appears to be in the written law. Rarely criminals really spend long time in prison. Local PSB officers my even actively seek to help infringers. Nonetheless, there have been recent cases in which counterfeiters have been severely convicted to unusually highs terms of imprisonment.

Generally, for a brand owner with a comprehensive IP portfolio, more effective and comprehensive enforcement strategies could be conceived by properly coupling and timing the enforcement of different sets of IP rights existing on the same product before different enforcement authorities. For instance, in some cases, especially when the infringer is a registered legal entity and not just an underground venture or where valuable and complex or expensive manufacturing tools are involved, following up a raid with judicial enforcement of the trademark or enforcement of the parallel design patent rights will surely add a beneficial deterring effect to the original administrative raid.

 

EDTullioElio de Tullio is an Italian lawyer admitted at the bar of Bari and a trade mark attorney. After 10 years of experience in IP matters, he founded in 2005 the law firm De Tullio & Partners, with offices in Rome and Bari and a liaison office in New York. Managing Partner of De Tullio & Partners, he acts as trade mark attorney in the strategic assessment of IP protection and in prosecution and opposition processes at domestic and international level. He is also a litigation lawyer before the Italian Courts specialised in Intellectual Property. He specialises on general patent issues (from a strategy, business intelligence, competition, prosecution and filing perspective), trade marks and designs. He has written an article on Italian and European law on design which has been translated into Chinese.

 

GBucciarelliGiacomo Bucciarelli Is a junior associate and trademark paralegal at De Tullio & Partners. Graduating in law at LUISS University in Rome in 2013, Giacomo practises fluently in Italian and English and specialises in European Union Law and Intellectual Property.

 

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